3 to 5 year outlook on trends post- GFC

with a focus on the Financial Industry in Australia

The Other School of Economics

theotherschoolofeconomics.org
@leLaissezFaire
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 The GFC is the latest iteration of ‘Manias, Panics, and Crashes’ that have marked the
history of capitalism - a number of trends are shaping what is coming up next…

• Explosion of human population

• Science and Techniques 1. Socio-demographic & Customers trends
• Health Convenience, personalisation, relevance and value = consumer
• Trade & commerce decision making
• Travels
2. Macroeconomic trends
Post-GFC environment

3. Technology (factors of production) trends

Efficiency, mobility, connectivity, data, consumerisation of IT, new
industries
( ,illustrative)
4. Business Competition trends
Customer disintermediation, choices, alternative business models

5. Environmental trends
Climate + energy + food crisis + population = social, political risk

6. Geopolitical trends
Rebalance China-US-Europe, conflicts, power shifts

7. Regulatory trends
Swing away from ‘laissez faire’

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 … a convenient and classic framework to analyse them is to look at the demand,
supply and environmental forces impacting ‘the system’

Demand-Side Forces Supply-Side Forces

 Macro-economic
• GDP, Unemployment, etc
• System growth, etc
Competition
& New Business Models
• Traditional vs Non-traditional
• Domestic vs international


 “The System”
(with a focus on
the Financial Industry)
Factors of production

Socio-demographic

 
• Technology
• Changes in demographics
• Labour
and social behaviours
• Business processes

Environmental Forces

Government & Regulation

Geopolitical Environmental
• ‘Hard’ regulation
• Power shift to creditor nations • Climate change
(‘Basel III’, competition law, etc)
• International context (terrorism, • Energy crisis
• ‘Soft’ intervention
foreign policies, etc)
(political environment, ‘social dividend’)

  ☯


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Globally, the population is ageing, becoming more urban and has increased
access to education…
 Rise of mega cities (mostly located in Asia)
 Most developed nations will be faced with a shrinking workforce (the US seem to
be an exception)
 Fewer and fewer workers per retiree and per child in developed nations: pensions
model under threat
 Health Care issues
 The “singularisation” of ageing societies causes increased social isolation: hence
need for “personal services” to compensate the dissolution of the social construct.
 Higher levels of education and workforce participation are improving the economic
independence and empowerment of women, which is resulting in marriage being
postponed in both developed and developing countries
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Socio-Demographics

How this has been shaping the system:
“Convenience, personalisation, relevance and
value are becoming increasingly important in
consumer decision making”
• Ageing populations in core markets: product
demand with an increasing focus on retirement
income products.
• Impact on savings patterns: business models need
to evolve to ensure they remains relevant to
“Generation-Y” and future generations, must also
ensure that they are able to retain older
employees.
• Social structures in developed markets will be
more diverse, driving changes in products and
delivery channels.
• Changing demographics will drive changes in
employment practices and requirements.
• Focus on Agri and Health products (to “feed” the
population and “look after it”)
• The ‘diversity agenda’ is not a topic on the side: it
is at the core of the post GFC values (emphasis on
Ethics) and reinforced by the workforce diversity
coming from developing nations.
3
 Socio-Demographics


… in western countries like Australia behaviours are changing under the
pressure of new generations and the effect of the economic crisis
How this has been shaping the
Example: Australian Population by Age Group (1) system:
2008
“The recession has been unsettling:
Record birth number
citizens have lost trust in
“Echo boom”
reflected the fertility 1971 (276,361) not businesses and Markets”
# Highest birth rate ever
years of the boomers beaten until 2007 recorder 1961 (3.5 per
350,000 • Feeling financially unprepared, more
Australia’s mini woman)
risk averse
baby boom
300,000 Post WWII baby
• A trend towards austerity has
boom
emerged (will it sustain?). People
250,000 became more frugal, less hedonistic:
ie. Reduced expenditure, less money
Generation X

on expensive leisure, more focus on

Generation Y

200,000
Generation Z

home expenditure.
Boomers

Builders
War babies
150,000
• Generally mistrust of Big Business,
particularly Banks
100,000
Born 1995-2009 Born 1980-1994 Born 1965-1979 Born 1946-1964 Born 1925-1945 • Wary of ‘Business Experts’, starting
% of pop: 18% % of pop: 21% % of pop: 21% % of pop: 24% % of pop: 13%
50,000 % of workforce: % of workforce: % of workforce: % of workforce:
to be selective about relationships
% of workforce:
Today: 0% Today: 18% Today: 44% Today: 36% Today: 2%
2020: 12% 2020: 35% 2020: 37% 2020: 16% 2020: 0% • Strong response to well priced, simple
0
offerings, ethical products
0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100+
2010 2000 1990 1980 1970 1960 1950 1940 1930 Age (Years)
 Generations Y and Z will represent half of
the workforce by 2020
(1) Total = 21,373,998
(2) Assumes last significant downturn ended in 1992, and treats post dot-com period as a small slow down
Source: ABS Cat 3201.0

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 Macro- Economics
The main macro-economic pattern is a slower growth in western countries and
the confirmation of China’s economic dominance… 
Real GDP Growth1 How this has been shaping the
2010 – 2012 (%)
system:

“Slow growth + strong public sector

+ decarbonisation of the economy*”

- The recovery is underway

- The global economy will be even

more significantly dependent on Asia
(and particularly China) due to the
higher relative rates of growth in those
markets

- Business Growth (Return on Equity)

will come at a premium with greater
competition for smaller ‘profit pools’
Lower balance sheet growth Lower target ROE
%
25
ROE
Overall growth in bank lending
%
capacity
15 15 Australia
Euro area
10 UK 10 Europe
US
5 5
US
0 Japan
0
-5
-5
-10
-10
Average 07-08 08-09 Ext. 09-10 Est.
2002-07 2003 04 05 06 07 08 09 10
Est Est
(1) Source: OECD

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 Macro- Economics
… as well as a stronger public sector due to government interventions during
the crisis putting them in position of ‘owner of last resort’ 
NON EXHAUSTIVE

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 Technology
In the past decades technology innovation has come from IT which is now
reaching ‘maturity’ - what will the next innovation cycle be? 
S-Curve for computers and IT We are here
How this has been shaping the system:
1. 60-70s (radical innovation) invention of microchips, 1st
computers “Customer experience, efficiencies,
2. 80-90s (1st growth + early adoption): personal computers, data flow, connectivity, mobility” but
2 internet what is the next wave of innovation?
3. 2001 (Shakeout) Explosion of the dot-com bubble. Fittest
1 5 business models survive (Microsoft, Oracle, Google, etc) • Online Technology-enabled business
4. 2002-10 (2nd boom + maturity) Efficiencies through mainstream models (peer-to-peer lending, new online
4 adoption of models incubated in the last decade: broadband,
financial brokers, payment engines &
outsourcing, mobility,
5. 2010-20+ (Peak of efficiencies) Emergence of next wave: data,
evolving forms of exchange,
3 disaggregation, online account
connectivity, augmented reality, etc
management tools, mobile banking)
• Financial data mashed-up with social
information, geo-location, context of
transactions anytime anywhere
• IT outsourcing is not going away
• Biometrics security, fraud prevention
From the room… … to the plastic box… … to your hand on the street… • Digital money
(processing of raw data) (dissemination of IT) (augmented reality) (e-currency)

Up-coming Technology trends

• Connectivity: always on, broadband • New technologies: nanotechnologies, robotics
• Mobility: anywhere, proximity, geo-location • Selected, developing nations ‘leap frogging’
• Simplicity: data, seamless across multi channels technology progress in the developed
world: China has a proficient ‘copy cat’, South
• Consumerisation of IT: new technologies & models originate
Korea & India are examples of developing
and develop in the consumer space, which is now the main
nations already ‘leap frogging’ developed
driving force for innovation in enterprises
nations in technology innovation: Microsoft • Next Innovation cycle likely to be
• Social evolution: users play an active role in the process of Research India is developing products such as
collecting, reporting, analysing and disseminating information.
focused on green technology and
text-free user interfaces for illiterate or semi- recycling
• Energy: The price for energy is high, coupled with illiterate users in developing nations.
environmental concerns: Green-IT
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 Industry Structure
The financial crisis has ironically been very good for the surviving big banks,
which is now causing concern - the return of more competition is now needed

How this has been shaping the system:
•‘Traditional’ Banks Dominate their local markets. In
Australia, Oligopoly of the Big Four causing
“competition regulator has started expressing concerns (…)
concerns.
major banks are too big to fail (…) they are not normal private
companies and should not be regulated like normal
•‘Foreign’ competitors: limited presence in the retail
companies” - Joe Hockey, Australian Shadow Treasurer, Oct
sector, but stronger presence in the markets and
2010
institutional sectors
(Citigroup, HSBC, DB)
Direct effect of the GFC: consolidation of Banks and a reduction of
competition:
• CBA bought BankWest
• Westpac bought St George
•Independents: compete on ‘specific parts of the
• NAB bought Aviva and GSJBWere
Financial Services value chain’ - emulating what
• AXA Asia Pacific purchase by AMP is imminent
Paypal did to payments by breaking the bank’s
monopoly
•Foreign players: had to focus on their troubled domestic markets
with no money to spare for overseas operations
•Alternative funding: eg. Online auction-based
market for receivables targeting small to medium
•Independent sector: 2nd tier lender (non banks) wiped out of
size businesses
Australia during the crisis: they could not source funding because
did have deposits, also killed by the guarantee given to the major
•Money management platforms: eg. Free online
banks
platform providing money management advice
based on a clients objectives
Mid-term, two forms of business model will emerge
•Existing players to attempt to build various forms of
•SME financing platform: eg. P2B lending platform,
‘relationship’ based models
allowing lenders to connect with borrows and set
•New technically enabled specialists will continue to enter
their own terms
with product centric models designed to extract ‘rents’ from
specific parts of the value chain
•Portfolio mgmt, e.g. Links budgeting tools with
savings goals to provide portfolio guidance

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 Environment
The need to address environmental issues is widely accepted - However
significant action is still lacking

Energy How this has been shaping the system:

- Global primary energy demand increasing 40% between 2005 and 2030, causing a scarcity
of natural energy resources
CO2
- Annual global emissions of CO2 expected to more than double between 2008 and 2030
- Average daily global temperatures rising by up to 0.64 degrees Celsius by 2030, and sea
levels by almost 1 metre by 2100
Food
- Food demand continuing to grow exponentially resulting in price spikes and shortages:
- 40,000 people a day die from hunger-related causes.
- 3/4 of ocean fish stocks are over-fished
- World grain stocks have fallen to a quarter century
low in 2008, driven by storage cost pressures,
leaving the world less able to deal with shortages.
- These problems will be exacerbated by impacts
from climate change (50% predicted decline in
rain-fed agricultural yields in Africa by 2020.)
Water
- Demand for fresh water outstripping supply by 2030
ngs alarm bel
Dust storm ri
ent protectio
for environm
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“We face a genuine planetary emergency, we cannot
just talk about it, we have to act on it, we have to
solve it, urgently”
– Al Gore
Key Uncertainties:
- Consequences if China and India do not respond to
the climate change crisis?
- Timing of the climate change ‘tipping point’?
- ‘winning’ nations and industries from climate
change?
- Geopolitical impact of scarcity of food and water
(conflicts, large-scale migrations)?
- Consequences if viable, alternative energy resources
are not found.
Implications:
- Identification of winners and losers from climate
change: (e.g. impact on the value of land held as
l security, as it is impacted by drought and flood; which
n new industries and key players are likely to emerge;
impact of instability coming out of Food & Water
shortages & price volatility.
- Who will take advantage of carbon trading market,
and other environmental trading markets as they
develop?
- Growing importance of Agri sector
- Risk of the failure to take significant action (failure
of Copenhagen, delay of the ETS in Australia, etc)
9
 Geopolitical
Geopolitical imbalances in representation within international governing bodies
are corrected - Will it be enough to prevent the next crisis? 
UNSC G7 G8 Largest Sovereign Wealth Funds (SWFs) How this is shaping the system:
Canada United Arab Emirates Kuwait
France Saudi Arabia “We've got to bring the surplus
Hong Kong
Germany Norway countries into the political framework.
G 20 Libya
d by
Italy China You see, the G7 is made of debtor
e Qatar
Japan la c countries, countries like the United
UK
Rep Singapore Algeria
States, Britain, France, Italy, these are
Russia Australia
US all borrowers, there's no surplus
Russia 8 out of the top 10 SWF's in the world originate in countries in that.
EU Asia or the Middle East representing $2.3 trillion, And if you look at the structure of the
or 72% of the top 45 state owned funds IMF, the Chinese get 3.7% of the vote,
China
(May 2008, SWF Institute)
the Indians get 1.9%, the Europeans
and Americans get 51%.
Domino effect feared by political And there's just no way the Chinese
IMF votes: a system weighted towards Europe
leaders during the GFC Communist Party is going to hand over
Financial: markets under stress control of their currency and their
political fortunes to a Washington
Economic: country’s economies & based US Treasury run institution. So
business under stress
unless there's going to be a complete
Social: unrest, social tensions, terrorism resettlement…
- Paul Keating, ABC Lateline, 2/2/09 ”
Political: regime instability, conflicts
Implications:
- Wealth pools are shifting globally - who
are the new power brokers?
- Risk assessment and contingency
planning
- What will be the catalysts of the next
financial crisis?
- How long will the consequences of the
Global Financial Crisis of 2008-09 keep
Shaking Up the Boardroom at World Government Inc. unfolding?
http://www.nytimes.com/2009/01/04/weekinreview/04traub.html?_r=1&ref=business January 3, 2009
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 Regulation
In the aftermath of the crisis regulators and policy makers have clearly
intervened with the promise that systemic issues will be addressed… ☯
Regulatory Issues How this is shaping the system:
Perceived Regulatory Issues Addressed by Regulation
at the Origin of the GFC • linkages between returns generated, “The great neo-liberal experiment of the
Business risks taken, and incentives past 30 years has failed … the emperor has
Perverse, conflicting, Practices • Removal of sales incentives and no clothes. Neo-liberalism, and the free
incentives practices that drive a divergence of
market fundamentalism it has produced
interests between consumers and
suppliers has been revealed as little more than
Growth of the personal greed dressed up as an economic
‘shadow’ banking • Force as much ‘off balance’ sheet philosophy” - Kevin Rudd, Jan ‘09
system GFC Transparency exposure on to the balance sheet as
and Complexity possible
• Mechanisms that provide stronger ‘Disclosed’ Swing away from laissez-faire
Product opacity and
oversight and standardisation of • capital adequacy levels and disclosure
complexity OTC markets requirements
• Enforce further Board accountability • regulation of complex derivative instruments
Poor (liquidity) risk for knowledge and approval of
product design and risk (especially liquidity)
management ‘complex’ product exposures
management
practices
• Greater emphasis on more extreme • Declared focus on better business practices
Risk and Capital stress testing, and incorporation of with less conflicts of interest, greater
Management results into overall capital
transparency, more capital and greater
requirements
• General increases in the level of international harmonisation
capital to be held across the industry
• More stringent liquidity requirements In the meantime, the government’s primary
International Co- concern has been to maintain the stability of
• Strengthening of co-ordination
Community Pressure ordination across international regulators the financial system

Banking Fees and Government declared intentions to focus

Costs • Pressure on bank executives to pass on rate cuts in full and to reduce fees and
charges on sensitive products on community concerns:
• fees, charges and rates
Unemployment and • Strong discouragement for ‘off-shoring’ at least politically sensitive (high • off shoring concerns: Actions to maintain
Working Conditions employment, or high customer) visibility processes. sector employment, particularly in politically
• Support for changes to executive pay and incentive structures. Sales legislation to
sensitive customer facing processes
Business Practices provide greater consumer protection against conflicts of interest. • Greater protection for financial services
consumers
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 … however whether those promises of systemic changes will be fulfilled is yet to be
proven

“The precise shape of the new economy that will emerge is of course impossible to predict, but there are some early pointers.
It is likely to be knowledge intensive, to value sustainability, to be less tolerant of global inequality and, in a sea of instant
communication, to demand greater regulation.”
- Griffith Review, Sept 2009

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